Revisiting the Health Savings Account Opportunity

With market forces likely to drive significant HSA growth, financial institutions must refine their strategies and solutions to capitalize on the revenue potential of these tax-advantaged accounts.

Health Savings Accounts (HSAs) were created in 2003 so that individuals covered by high-deductible health plans (HDHPs) could receive tax-preferred treatment of money saved for healthcare expenses. For financial institutions, HSAs represent a significant opportunity to grow deposits, fees, interest and interchange revenue -- and a unique opportunity to strengthen and grow relationships with commercial clients, as well as to help consumers to manage their ever-growing financial responsibility for healthcare costs.

However, 10 years after HSAs were first established, many financial institutions have struggled to gain traction with HSA programs. With market forces poised to drive significant HSA growth over the next several years, financial institutions, now more than ever, must recognize the significant revenue potential of these tax-advantaged accounts and refine their strategies and solutions to capitalize.

Market Forces Are Spurring Rapid HSA Growth

Advisory firm Aite Group predicts that HSA adoption will grow by a compounded annual growth rate (CAGR) of 21% through 2017 -- outpacing the growth of other benefit account types, such as FSAs and HRAs. This means that by 2017, there will be a forecasted 20.9 million HSAs in the market.

HSA adoption is closely tied to the adoption of HDHPs -- which are also experiencing a steep growth curve. Several market forces driving HDHP/HSA adoption include:

The Shift to Individual Responsibility. Spurred by the unsustainable growth of healthcare costs, U.S. employers are increasingly shifting the financial responsibility for health insurance to employees in the form of higher deductibles, reduced coverage, decreased subsidies, or -- in some cases -- the elimination of health coverage. As a result, many employers are moving away from more traditional plan types in favor of HDHPs, coupled with tax-advantaged accounts such as HSAs and HRAs.

The Affordable Care Act. Healthcare reform, through individual insurance mandates, premium subsidies and the creation of public insurance exchanges, will significantly expand the insured population in the U.S., and many of the newly insured will choose HSA-eligible HDHPs. HSA contribution rules and eligibility criteria were utilized to a large extent in the Affordable Care Act in setting up the benefit tiers and essential benefits package for the public health insurance exchanges. The minimum level of coverage required to meet the individual insurance mandate was specifically designed to allow for the purchase of HDHPs.

The Retail Revolution in Healthcare. Catalyzed by healthcare reform and increased employer adoption of defined contribution and private insurance exchanges, the healthcare market is transitioning from an employer-centric "wholesale" model to a more consumer-centric "retail" model. Over the next five to 10 years, this trend to retailization will create a market of more than 100 million consumers choosing their own health insurance coverage. Faced with a wider array of benefit choices, greater cost transparency and more financial accountability for plan selection, a greater percentage of consumers will choose high-deductible plan types -- making insurance exchanges a natural distribution channel for HSAs.

But Operational Challenges Must Be Overcome

By nature, HSAs are more complex than other benefit accounts. Unlike FSAs and HRAs, HSAs are individual accounts and therefore require a financial custodian. They have dependencies on other benefit elections (high-deductible health plans) in order to determine eligibility. HSA offerings require significant education and engagement resources for both employers and employees to ensure a seamless experience. Contextually they share similar characteristics and requirements with other benefit account types -- therefore ideally should be distributed through common channels.

For financial institutions, HSAs present operational challenges. HSAs are not just another deposit account -- they are complex and they have unique requirements with respect to enrollment, account funding, accountholder education and engagement, reporting, sales and marketing, and more. Many financial institutions have historically struggled to gain traction with HSA programs due to operational issues, platform limitations, lack of demand, or lack of familiarity with the market.

Comprehensive Solutions Are Needed

As HSAs are staged for rapid growth, financial institutions that are serious about pursuing the HSA market opportunity require a simple, comprehensive and flexible technology platform that can address the unique needs of an HSA.

At its core, the platform must deliver the necessary recordkeeping functionality to perform required HSA services -- from transaction processing, interest payments, contribution and distribution tracking, IRS reporting, and more. If interoperability between HSAs and other benefit accounts (such as FSAs and HRAs) is a requirement, the platform must simplify and standardize administrative functions such as stacking/ordering of accounts, funding and maintenance, balance reconciliation, invoicing, employer servicing, and card administration across all account types. Finally, the platform must enable financial institutions to cultivate a superior consumer and employer experience -- including comprehensive online and mobile tools to empower consumers and employers with information and self-service capabilities.

The Time is Now

With market forces aligned to drive unprecedented HSA growth, financial institutions are in an excellent position to capitalize on the HSA market opportunity. However, in order to avoid the missteps of the past, financial institutions must carefully consider whether they have the strategy and infrastructure in place to be successful. The time to act is now.

Great point Kathy. People like to talk about consumerization when it comes to corporate IT (mobile phones, social media), but the need to offer more personalized service for HSAs and other health plans is huge. The individual is comparing their health insurance experience to other online experiences (banking, auto insurance). Right now, the online health insurance experience is lacking.

Good update on the opportunities around HSAs, Tom. Another, related consideration is the "consumerization" trends around health insurance in general. As health insurers shift their focus to employees/individuals, instead of mainly groups/employers, customer expectations around health insurance delivery are evolving as well -- they will expect the processes around using their HSAs to be as simple as interacting with an e-commerce site, or even with other aspects of banking (e.g., mobile). So treasury services units (or whichever part of the bank administers HSAs) will need to take that into account. I wonder if that will be challenging since they are used to working with businesses, not consumers.